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Planning to live on dividends, interest and SS, leaving principal untouched. 75 percent in seps, IRAs and Roth. 25 percent taxable accounts. Stock heavy currently. Suggestions on how to avoid heavy taxes when hit with rmds twelve years from now.
Thanks
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Suggestions on how to avoid heavy taxes when hit with rmds twelve years from now

Pray for a market crash. I hope your prayers are answered in the negative.

I have never understood RMD-induced panic. Higher account values mean higher RMD's. Just like any other kind of income, more RMD income means more income tax.

If you don't know, Roth IRAs are not subject to RMD's. One avenue available to you for decreasing future RMD's is to reduce non-Roth account balances through conversions to Roth over the years. However, you shouldn't just rush into this focused solely on reducing RMD's. It all depends on what your tax situation is today vs. what you think it will be when you turn 70 1/2. For example, if you're in the 35% bracket today and anticipate you'll be in the 25% bracket when you face RMD's, you could well be shooting yourself in the tax foot by doing conversions now and paying 35% when you could wait and take RMD's costing you 25% (and in much cheaper dollars because of inflation).

Phil
Rule Your Retirement Home Fool
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Thanks Phil. I'm aware of Roth no tax. My worry is my principal in seps doesn't reduce, annual RMD will be large based on IRS formula. We were only recently eligible for Roths, so started Them (me and wife) and
will continue to max them out as long as working. In fact did convert some Ira funds to Roth but not sure converting more is wise tax decision. I think I need to develop best withdraw strategy.
Plus don't know whAt rates and laws will be at that time. Meeting with my Fidelity advisor on this subject soon. Any advice on withdraw formula based on what little you know of my situation?
Thanks
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Planning to live on dividends, interest and SS, leaving principal untouched. 75 percent in seps, IRAs and Roth. 25 percent taxable accounts. Stock heavy currently. Suggestions on how to avoid heavy taxes when hit with rmds twelve years from now.
Thanks

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Having to take RMDs isn't a hardship for anybody, until you start to approach age 90, if then.

At age 70, when the requirements kick in, the RMD divisor is 27.4; so if you have $1,000,000 in retirement funds at the end of the preceding year, you have to withdraw $36,496 that year. How burdensome is that?

Also, as you get older, your RMDs go up, and so do your medical expenses. Things seem to work out.

Bill
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Suggestions on how to avoid heavy taxes when hit with rmds twelve years from now.

Once I hit 59.5, I plan to run projections every year to see if I am better off starting to move money out of tax-deferred accounts before I have to. There's nothing magic that says it's always a good idea to wait for RMDs.

Things may change but also look at how each type of account with be transferred or inherited in case of either or both dying.
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Also keep in mind that you only care about RMDs if the RMD is greater than your needs. So if your RMD is $36k, but you need $40k for your retirement expenses, there is zero excess tax burden because of the RMD.

Also, I've got nothing specifically against Fidelity advisors. Just keep in mind that advisors such as this are generally concerned with their current income - and concerned about your retirement income only to the extent it doesn't conflict with their current income.

In short, they are biased. You might confirm some plans with a fee-only advisor, or even discuss things with your tax professional. Many of them also consult on general financial advice.

--Peter
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Planning to live on dividends, interest and SS, leaving principal untouched.

I would love to do that, but I cannot. Taxes go up. Food goes up. Medical expenses go up. Heating goes up. I was going to put off withdrawals from IRA indefinitely but I had to start when I was 65 and 2 months. I hope investments go up faster than true inflation, but I am afraid they will not. It is scary out here.
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I have never understood RMD-induced panic. Higher account values mean higher RMD's. Just like any other kind of income, more RMD income means more income tax.
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I believe it is a "savers" thing, everyone thinks they have to spend the RMD, they don't, they can put it in a after tax saving account. When I first started running into this, I thought it was a depression era thing, but most who have large pensions or IRAs seem to have the same panic.
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everyone thinks they have to spend the RMD, they don't, they can put it in a after tax saving account.

The tax law does not require me to spend my RMD, but the economic law does require me to do so. My expenses keep going up.

If I do not pay my property tax, I lose my house. When I bought this house, property tax was $800 a year. Now it is over $6000 a year. My income has not gone up anywhere this much. The original owner paid $10,000 to buy the house. In a few more years, the property tax will probably be that much EVERY YEAR!

If I do not pay medical insurance premiums, I must forgo medical care. Just when I had to pay for a stroke, heart attack, and other hospital-treated conditions that I never had to pay in the past. And this is in spite of being covered by so-called health insurance. Insurance for the insurance industry. Insurance for the pharmaceutical industry. Insurance for the hospitals. Deductables for me. Copays for me. Doctors who will not take my insurance because it is not enough.

If I do not pay for food, I do not eat.

If I do not pay my income taxes, the state and the feds will probably just get court orders and grab it from my savings.

I was going to defer collecting my social security until well after I was 65. But by then, even though my home mortgage was paid off, my monthly (actually quarterly) tax payments had risen to the point I needed my social security to pay my property tax (not all of my S.S., but quite a bit of it). Gasoline has gone up. Home maintenance mounts up: New roof: $8000. New windows: $12,000. New heating system and removal of old in-ground oil tank: About $12,000. Now these expenses are not all needed every year, but each year it is something, and my defined benefit pension has not been increased since about 1992. But my expenses have.

I really worry about my friends even more than me. I am the richest of all the people I know, and am in constant fear that inflation will get me.
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I believe it is a "savers" thing, everyone thinks they have to spend the RMD, they don't, they can put it in a after tax saving account.

It is also a dislike for paying taxes on distributions that aren't immediately needed.
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"It is also a dislike for paying taxes on distributions that aren't immediately needed. "

Yeah, how soon we forget how long those contributions and/or earnings have gone un-taxed.

-drip
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It is also a dislike for paying taxes on distributions that aren't immediately needed.

Exactly. It's not panic so much as the unpleasantness of seeing $20,000 of your money suddenly become $15,000 or less, depending on your tax bracket and what state you live in. It's like a tax on getting older. Of course, that money was sheltered from taxes when it went into the IRA at a time when the tax rates were likely higher. But that's not what you think about when you write the check to the Treasury Department.

--fleg
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...At age 70, when the requirements kick in, the RMD divisor is 27.4; so if you have $1,000,000 in retirement funds at the end of the preceding year, you have to withdraw $36,496 that year. How burdensome is that?...

The kicker is that on average the IRA will likely grow more than the RMD of 3.6% so at the end of the year you will likely have more than the million in the account that you started the year with.


Even at the age of 90 when the divisor is 11.4 that is only 8.8% so if your investments are earning more than 8.8% you will still not be drawing down the portfolio.
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Always glad to have to pay some taxes. It means I have some income to live on. We have a new 62 and over apartment complex opening here with a maximum income limit of $27K for singles and $31k for a couple. I'd hate to be in a position where I was eligible for that, but I know a lady who is moving there. I always thought she was left with some money when her husband died but I guess not. She could easily live another 20 years. I'd rather be paying taxes than to be in her situation.
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A side effect of RMDs that I didn't see mentioned is their secondary effects that could cost you money. Taking an RMD that you don't need for living expenses may push your income to the point where more of your Social Security is taxable. And cause your Medicare premium to go up. That's all in addition to the tax on the RMD itself.

--fleg
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A side effect of RMDs that I didn't see mentioned is their secondary effects that could cost you money. Taking an RMD that you don't need for living expenses may push your income to the point where more of your Social Security is taxable. And cause your Medicare premium to go up. That's all in addition to the tax on the RMD itself.

That's really not an issue. You don't start paying more in Medicare premiums until well after you hit the max taxable amount on your social security benefits.

Medicare premiums don't start increasing until you get to $170k in MAGI (the modification here is to add in any non-taxable interest income). Cut that in half for singles. http://www.ssa.gov/pubs/10536.html#a0=2

You hit the max taxable portion of your SS benefits not long after $44k of income for joint filers ($32k for singles).

In either case, the taxable portion of your Soc Sec benefits is maxed out before your Medicare premiums start increasing.

A married couple would need to be living on less than $44k of income AND have an RMD that is almost $130k MORE than their needs before their Medicare premium would be increased because of RMDs.

For a single, they'd need to live on less than $32k and have RMDs $50k over their needs.

--Peter
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A married couple would need to be living on less than $44k of income AND have an RMD that is almost $130k MORE than their needs before their Medicare premium would be increased because of RMDs.

Good to know. Thanks for the numbers.

--fleg
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For a single, they'd need to live on less than $32k and have RMDs $50k over their needs.

This is why I started doing projections even long before 59.5.
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